Reliance analysts take on the March quarter result

What some of the top broking firms think about the Company's Q4 performance

Being the largest private sector player both, in market capitalisation and sales, Reliance Industries (RIL) has always attracted a large share of interest among the investing community. The company announced its results post market hours on Friday, April 20, 2012, which continues to remain weak.

As has always been the case, the same set of data announced by the company has been interpreted differently by various analysts. We bring you a summary of what some of the top broking firms think about Reliance’s results.

Goldman Sachs

Rating: Buy (maintained)

Price Target: Rs 945

Rationale: While RIL’s fourth quarter results were impacted by improving but still relatively low refining margins, we believe the cycle should improve in second half of 2012-13 driven by benefits from the closures in US/Europe, delays in new projects and recovering oil demand. On the Exploration & Production (E&P) front, RIL, for the first time, laid out plans to turnaround production with an integrated development plan. We believe any positive news flow on the E&P front would be positive for the stock, which is implying zero E&P value today.

Deutsche Bank

Rating: Buy (maintained)

Price Target: Rs 870

Rationale: We see initial signs of improvement in RIL’s domestic E&P portfolio, with Management Committee approving the integrated survey of all 16 discoveries in KGD6. RIL’s focus over the next 12 months will now be on the integrated survey leading to an integrated development plan in KGD6 and on accelerating development of NEC25. It also plans to carry out work-over operations to augment production and reduce water ingress in producing fields in KG D6.
The US shale gas EBITDA contribution to RIL was $250 million in FY12 and we estimate this to increase to $1.6 billion in FY15. While catalysts in the near term remain elusive, equity buyback could provide downside support to the stock.

HSBC

Rating: Neutral (upgraded)

Price Target: Rs 800

Rationale: It was for the first time since the year 2000 that the company has reported two sequentially lower quarters. The consolidated profit was lower than the standalone net income by Rs 320 crore partly due to the net loss from retail businesses while there was minor positive contribution of Rs 150 crore by the shale gas business of RIL.

The company finally disclosed its future plans for gas ramp-up after several quarters of silence. It has now obtained approvals to proceed with pre-development activity, which will lead to submission of an integrated development plan incorporating all discoveries in its D6 gas block. We expect company to commence its development activities by first quarter of 2013. We anticipate the current petrochemical margins to have only moderate downside from current levels as market attains demand supply equilibrium. We anticipate moderate improvement in GRM due to better gasoline and distillate margins.

Kotak

Rating: Reduce (maintained)

Price Target: Rs 770 (lowered from Rs 800 earlier)

Rationale: The weak results reflect continued weakness in refining margins and lower production from KG D-6 block. We do not expect meaningful improvement in RIL’s key businesses over the next 9-12 months. In our view, RIL will have to demonstrate value creation in new investment areas for the market to be more excited about its large cash position and recurring cash flows.

JP Morgan

Rating: Underweight (maintained)

Price Target: Rs 650 (lowered from Rs 800 earlier)

Rationale: RIL highlighted that with D6 reservoir behavior diverging from initial expectations, a revised integrated plan is being worked on, to bring on production from additional areas in the field. RIL acknowledged reservoir difficulties at D6 would lead to a downward revision in reserves (12-15%). With upstream difficulties well known, we expect refining and petrochemical margins to drive earnings and stock performance in the coming quarters.

BNP Paribas

Rating: Buy (maintained)

Price Target: Rs 827

Rationale: RIL was forthright in explaining the reasons for the output decline at KG-D6 and has submitted a revised FDP to raise gas production from D26 and is working on an integrated development plan for D1/D3, D6 satellite and R-series discoveries. Production upside is unlikely in the next 18-24 months as RIL-BP work to submit the integrated development plan in current year. BP had paid around $3 billion (40% of deal value) to RIL as ‘intangibles’, which is a show of confidence in monetising other major discoveries, like R-series, KG-D6 satellite and NEC-25, and along with coal bed methane (CBM) development will be key for clarity on E&P value accretion. A positive surprise in GRM could be valuation trigger with ~8% impact to EPS for every  $1/bbl increase in GRM, in our estimates.